Q1/06 (Cdn.) capital market activity was muted, with only two offerings raising $271 million. This compares to Q1/05 volume of $506 million. While issuance began to accelerate near the end of Q1/06, with four REITs raising $457 million (with planned Q2 closing dates), there is also some evidence that investors’ appetite for REIT and Income Trust equity may be waning.

Hmmm, the ducks aren’t quacking. This could be good news, if it doesn’t weaken further.

The MSCI US REIT Index posted a spectacular Q1/06 total return of +15.2%. Elsewhere around the world, listed property stocks in a number of countries, including Singapore, France and the U.K., also outperformed Canadian REITs.

Darn. We don’t have a lot of relative strength. That’s not good. Time to look abroad.

While RBC Economics forecasts a 10-year Government of Canada bond yield of 4.8% at the end of Q1/07, the collective wisdom of the bond market would suggest (through interpolation) that the 10-year GoC bond yield will remain largely unchanged one year from now, at approximately 4.4%.

I’ll go with the collective wisdom of the bond market over an economic forecaster’s any day.

Over each of the last three years, the FTSE EPRA/NAREIT Global Real Estate Index has delivered annual US$ denominated returns of +40.7%, +38.0% and +15.4%.

Not bad at all. I wonder if those numbers include the reinvested distributions.

First, investors have begun to price in an acquisition premium for likely takeover targets. Secondly, the REIT privatizations since the beginning of 2005 have returned or are expected to return US$15.8 billion of cash to shareholders of acquired REITs. Much of these proceeds, particularly those received by institutional investors, are likely to be recycled back into the REIT sector.

There seems to be a lot of institutional liquidity sloshing around looking for a home.

Outside of the positive developments related to the creation of a UK-REIT market, it seems clear that property investment and operating fundamentals remain solid. A November 2005 report from CB Richard Ellis (CBRE), a global real estate advisory company, stated that a record £50 billion (US$91 billion) of commercial real estate transactions were likely to occur in the U.K. in 2005.

The Japanese REIT (“J-REIT”) sector continued to rapidly expand in 2005. There were 27 REITs listed on the Tokyo Stock Exchange by the end of March 2006…However, in 2005, the +8.3% return from the J-REIT sector, as measured by the Tokyo Stock Exchange’s REIT Index, was relatively weak compared to the +53% return from the FTSE EPRA/NAREIT Japan Index.

Neat. I hadn’t checked in with the Japanese REITs for a while. Things are going very well over there.

In the wake of positive regulatory changes and robust economic growth, private investment groups have poured substantial sums of money into high-quality Chinese real estate, particularly for assets in major cities that have Western tenants. Recent transactions included Macquarie Bank’s joint venture in a portfolio of Wal-Mart anchored malls in northeastern China, the purchase of Shanghai’s World Trade Tower by a Morgan Stanley joint venture and a large build-to-suit project for Exel Logistics by Macquarie Goodman in Shanghai.

You don’t need to be a REIT analyst to see that the Chinese REIT market is staggeringly huge. But for now, the best way to play it would be through Australian real estate companies and REITs like Macquarie and Westfield.

To play the global bull market in real estate, you might want to keep an eye on closed-end funds like the ING Clarion Global Real Estate Income Fund (IGR):

As for the Canadian REIT markets; I use the following graph as handy timing model. As you can see, while it may not be the best time to go long, you’d probably do alright buying here - that is, if you’re in it for the long haul.

Also I wanted to congratulate the Canadian baby REIT, Whiterock. It is all grown up and headed to the big exchange.

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